MEHUL PAREKH & ORS. V. UNIMARK REMEDIES

Unimark Remedies
Represented by Successful Resolution
Case No: Company Appeal (AT) (Insolvency) No. 839 of 2023

Date of Judgement: 19th December, 2023

Judges:

[Justice Ashok Bhushan]
Chairperson

[Barun Mitra]
Member (Technical)

[Mr. Arun Baroka]
Member (Technical)

For Appellant: Mr. S.R. Jariwala, FCA, Ms. Purti Gupta, Ms. Henna George, Advocates.

For Respondent: Mr. Abhijeet Sinha, Mr. Dhrupad Vaghani, Mr. J.
Rajesh, Mr. Jaitegan Singh Khurana, Mr. Aditya,
Mr. Tushar Goel (SRA) for R-18.
Mr. Arpan Behl, Mr. Ishan, Mr. Kaustubh Singh
Advocates for SRA.
Ms. Pooja Mahajan, Ms. Mahima Singh, Ms.
Shreya, Ms. Arveena Sharma, Advocates for R-2.
Ms. Sanjana Pandey for R-3,8,11,15.

Facts:

Elaborate Opinions of Court:

Arguments:

Appellants:

Para 6.1.3 violates Section 30(2)(b) by discriminating between employees on basis of dues amount. Para 6.2 unauthorized as RP has already determined CIRP costs. CoC redetermination unfair and violative of Section 30(2)(a). Para 6.5 violates Section 30(2)(a) by making CIRP costs contingent on result of avoidance applications. Direction to pursue avoidance applications post Plan approval is legally unsustainable.

RP and Successful Resolution Applicant:

Appellants are related parties, not just employees. Payment can be differential compared to other creditors. Liquidation value payable to employees is NIL. Payment proposal valid exercise of commercial wisdom of CoC. RP appointed auditor, obtained audit report on CIRP costs. CoC approved costs of Rs. 92.41 crores. No further approval required. RP already filed avoidance applications against promoters/KMPs which are pending. Their dues can be set off against amounts recoverable.

CoC and Financial Creditors:

Relevant Sections:

Cases Referred:

M.K. Rajagopalan vs Dr. Periasamy Palani Gounder on treatment of related parties under IBC.

Download Court Copy: https://dreamlaw.in/wp-content/uploads/2024/01/21.pdf

Full Text of Judgment:

This Appeal by Suspended Directors of the Corporate Debtor has been filed challenging the order dated 17.04.2023 passed by the National Company Law Tribunal, Mumbai Bench-IV in MB-23/MB-IV-2019 approving the Resolution Plan submitted by Successful Resolution Applicant. The Adjudicating Authority in its order dated 17.04.2023 while approving the Resolution Plan has also issued certain directions. The Appellant feeling aggrieved by few directions issued by the Adjudicating Authority in the impugned order has come up in this Appeal.

2. The brief facts of the case giving rise to this Appeal are:

(i) On an Application filed by ICICI Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”), Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor Unimark Remedies Ltd. commenced vide order dated 03.04.2018.

(ii) The Resolution Plan submitted by consortium of asset Recovery Company (India Ltd., Intas Pharmaceuticals Ltd. and
Shamrock Pharmachemi P Ltd. was approved by the Committee of Creditors (“CoC”) by 72.25% vote share. On the basis of e-voting held between 24th December, 2018 and 26th December, 2018, Resolution Plan was approved.

(iii) The Resolution Professional filed IA. No.23/MB-IV/2019 for approval of the Resolution Plan, which Application came to be allowed by the order impugned. Aggrieved by which order this Appeal has been filed.

3. The reliefs sought in the Appeal are stated in paragraph 21, which are as follows:

“21. Reliefs sought In view of the facts mentioned in para 7 above, points in dispute and question of law set out in Para 8, the appellant prays for the following relief(s):
with following directions

No.	Para of Order dated 17.04.2023	Particulars of deletions sought	Directions prayed
1.	6.1.3	It was submitted by them on 03.02.2023 that the classification is not discriminatory as most of the ineligible employees are either promoters of KMPs who are responsible for the position of Corporate Debtor, in which it is. However, the Counsel for the RA fairly submitted that RA is not ready to enhance the total plan value for taking into account claims of employees but it has allocated a sum of Rs.5 crores towards their claims which is enough to cover their claim in accordance with provisions of Section 53 of the Code and dues.	To be deleted
2.	6.2	We find that exorbitant increase in CIRP cost is attributable to monthly losses in the manufacturing operations of the Corporate Debtor during the CIRP period due to low capacity utilization and high employee costs. We clarify that our observation in relation to CIRP cost should not be taken as our approval of CIRP cost claimed by the Resolution Professional in the submissions before us and CoC shall be competent to determine the quantum of CIRP cost payable under the Plan.	To be deleted
3.	6.5	We clarify that the Resolution Professional shall ensure that no claim in relation to avoidance transaction, where any of promoters/ KMPs falling under employees category, is pending for adjudication before the Adjudicating Authority before releasing the amount payable to such promoters/ KMPs under the plan. The amounts so detained shall be subject to appropriation towards amount found recoverable from such promoter/ KMP in accordance with the order passed by the Adjudicating Authority.	To be deleted
4.	9	The MA 269/2019 pertaining to adjudication of avoidance transactions Creditors and the proceeds of recovery in pursuance thereto shall be distributed amongst the Financial Creditor. If any balance is left after satisfaction of their admitted claim the same shall be distributed amongst other creditors in accordance with section 53 of the Code.	To be deleted

d) Pass such other and/ or further order(s) and /or direction(s) as the facts and circumstances of the case may warrant.”

4. From the reliefs as claimed in the above paragraphs, the Appellant prays for deletion of paragraph 6.1.3, 6.2 and 6.5 of the impugned order of the Adjudicating Authority, which are as follows:

“6.1.3. It was submitted by them on 03.02.2023 that the classification is not discriminatory as most of the ineligible employees are either promoters or KMPs, who are responsible for the position of Corporate Debtor, in which it is. However, the Counsel for RA fairly submitted that RA is not ready to enhance the total plan value for taking into account claims of employees but it has allocated a sum of Rs. 5 crores towards their claims which is enough to cover their claim in accordance with provisions of Section 53 of the Code and Hon’ble SC decision in Jet Airways in relation to gratuity dues.
6.2. We find that exorbitant increase in CIRP cost is attributable to monthly losses in the manufacturing operations of the Corporate Debtor during the CIRP period due to low capacity utilisation and high employee costs. We clarify that our observation in relation to CIRP cost should not be taken as our approval of CIRP cost claimed by the Resolution Professional in the submissions before us and the CoC shall be competent to determine the quantum of CIRP cost payable under the Plan.
6.5. We clarify that the Resolution Professional shall ensure that no claim in relation to avoidance transaction, where any of promoters /KMPs falling under employee category, is pending for adjudication before the Adjudicating Authority before releasing the amount payable to such promoters /KMPs under the plan. The amounts so detained shall be subject to appropriation towards amount found recoverable from such promoter/KMP in accordance with the order passed by the Adjudicating Authority.”

6. The Appellant submits that Adjudicating Authority committed error in issuing direction to CoC to redetermine CIRP cost after approval of Resolution Plan, which is not sustainable in law. The Resolution Plan having been approved, the determination of CIRP cost is to be done by the Resolution Professional, which has already been determined by the Resolution Professional, there was no occasion to issue a direction to the CoC to redetermine the CIRP Cost. It is contended that CoC has already approved the salary without any upper limit in its Meeting held on 03.05.2018. It is contended that CoC under the garb of redetermination of CIRP cost cannot reverse its own decision for its unfair gain. The expenses incurred by the RP for running the business of Corporate Debtor as a going concern being CIRP cost within the meaning of Section 5(13)(c) of the Code has to be paid first before any payment made to any other creditor. The Adjudicating Authority exceeded its authority in modifying the Resolution Plan approved by the CoC insofar as it issued directions for redetermination of the CIRP cost by the CoC. It is submitted that Resolution Plan insofar it discriminate between employees who have dues of more than INR 10 lacs and those who have dues of less than 10 lacs is contrary to Section 30,sub-section (2) (b) of the Code. The direction of the Adjudicating Authority to impose new condition in paragraph 6.5 that the Resolution Professional shall ensure that no claim in relation to avoidance transaction, where any of the promoters/ KMPs falling under employee category, is pending for adjudication before the Adjudicating Authority before releasing the amount payable to such promoters/ KMPs under the Plan. The amounts so detained shall be subject to appropriation towards amount found recoverable from such promoter/ KMP in accordance with the order passed by the Adjudicating Authority. This direction made by the Adjudicating Authority is violative of Section 30, sub-section (2)(a) of the Code, insofar as CIRP cost has to be paid before payment to any other creditors. It is further submitted that the Adjudicating Authority has directed that CoC shall continue to pursue the avoidance application after approving of the Resolution Plan, which is legally unsustainable. It is submitted that while issuing above directions the Adjudicating Authority has not given any cogent reason. Hence, the order of the Adjudicating Authority is untenable.

8. The learned Counsel for the CoC and Financial Creditors have also supported the impugned order and submit that order passed by the Adjudicating Authority is neither discriminatory, nor in conflict with provisions of the Code. It is submitted that classification made in the Resolution Plan in paragraph 3.3.2 is reasonable as held by the Adjudicating Authority vide order dated 17.04.2023 passed in M.A. No.933 of 2019, which order has not been challenged by the Appellant. Th salaries allegedly payable to the Appellants have not been incurred in order to keep the Corporate Debtor running as a going concern. Hence, they are not required to be paid as CIRP cost under the Code. Salaries were infact never specifically approved by the CoC.

9. We have considered the submissions of learned Counsel for the parties and have perused the record.

10. From the submission of learned Counsel for the parties and material on record, following are the issues, which arise for consideration in the present Appeal:

(I) Whether classification as made in paragraph 3.3.2 of the Resolution Plan between payment to employees, is discriminatory and violative of provisions of Section 30, sub- section (2) of the Code?

(II) Whether the Adjudicating Authority erred in issuing directions for redetermination of the CIRP cost by the CoC?

(III) Whether the direction of Adjudicating Authority to withhold the payment of CIRP cost to the Appellant, which payment was directed subject to appropriation towards amount found recoverable from such promoters/ KMPs in avoidance application, is violative of Section 30, sub-section (2) of the Code and unsustainable?

(IV) Whether the Adjudicating Authority erred in issuing direction to CoC to pursue the avoidance application pending for
adjudication before the Adjudicating Authority?

11. The first question to be answered as to whether there is any discrimination in Resolution Plan in making payments to employees of the Corporate Debtor differently from those whose dues are upto Rs.10 lakhs and those whose dues are more than Rs.10 lakhs. The Resolution Professional has filed reply in the Appeal and has given the details of claims submitted in CIRP of the Corporate Debtor and claims admitted. It has been pleaded by the Resolution Professional that no claim of workmen was received by the Resolution Professional. In paragraph 4.9 and 4.10 of the reply, following have been stated:

4.10 Clause 3.3 of the Resolution Plan deals with payment towards workmen and employee dues and provides for payment of INR 5 Crores towards workmen and employee claims in the following manner:
b) Second, towards full/ proportionate discharge of the liability of the Corporate Debtor for gratuity and leave encashment
INR 10 lakh, such employees shall not be paid anything and all liabilities of Corporate Debtor towards such employees’ claims shall stand waived and extinguished.”
d) In the event, the amount payable to workmen and employees, as contemplated above, is lower than INR 5 Crores, the
excess amount out of this allocated amount shall be added to the payment to the financial creditors.”

12. The learned Counsel for the Resolution Professional and Successful Resolution Applicant have relied on the judgment of the Hon’ble Supreme Court in M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder and Anr – (2023) SCC OnLine 574, to support his submission that payment to related parties under the Resolution Plan can be different from payment to other similarly situated creditors. The Hon’ble Supreme Court in the above judgment under “Point E – The matter concerning related party” has examined the said submission and in paragraphs 198 to 203 laid down following:

“198. Another factor taken into consideration by the Appellate Tribunal has been in relation to the so-called discrimination in the resolution plan in relation to a related party of the corporate debtor. 199. Learned counsel for the appellant in Civil Appeal No. 1827 of 2022 has referred to several decided cases to submit that therein, even when certain dues of related
13. The above judgment fully supports the contention of Respondent that with regard to payment to ‘related party’ there can be no discrimination nor any parity can be claimed by the ‘related party’ with regard to similar category creditors. The above judgment makes it clear that distinction between payment to ‘related party’, i.e., Appellants before us, cannot be found fault with. It is to be noted that it is the only ‘related party’ that has come up in this Appeal and we need to examine their claim of payments only.

14. It has been pleaded that liquidation value for payment to employees being ‘NIL’, they were not entitled for any more payment as has been proposed under Section 30,sub-section (2) (b) of the Code. The payments to Operational Creditors has to be as per Section 30, sub-section (2), which is as follows:

“30(2). The resolution professional shall examine each resolution plan received by him to confirm that each resolution
plan –

(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-
(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.
Explanation 1. — For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.
Explanation 2. — For the purpose of this clause, it is hereby declared that on and from the date of commencement of the
Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor-

(e) does not contravene any of the provisions of the law for the time being in force
(f) confirms to such other requirements as may be specified by the Board.

Explanation. — For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013(18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.”

15. It is not the case of the Appellant that amount proposed to the Operational Creditor in the category of employees is less than the amount, which they would have received in event of liquidation of the Corporate Debtor. Hence, we do not find any error in the distinction of payment as contained in paragraph 3.3.2 of the Resolution Plan. The distribution to the employees, whose liquidation value was ‘NIL’ falls within the commercial wisdom of the CoC and the said clause of Resolution Plan cannot be impugned on the said ground, nor the said proposal for payment is violative of Section 30, sub-section (2) (b) of the Code.

16. Now coming to Question No.(II), it is relevant to notice that CIRP cost as defined in Section 5, sub-section (13), which is as follows:

“5(13) “insolvency resolution process costs” means –

17. As per Section 5, sub-section (13)(c), costs incurred by the Resolution Professional in running the business of the Corporate Debtor as a going concern is part of the CIRP cost.

18. Under Section 28 of the Code, Resolution Professional is required to obtain ‘Approval of the Committee of Creditors for certain actions’. Section 28 provides as follows:

“28. Approval of committee of creditors for certain actions. –

(j) make any change in the management of the

(m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor.
(2) The resolution professional shall convene a meeting of the committee of creditors and seek the vote of the creditors prior to taking any of the actions under sub- section (1).

(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of 1 [sixty-six] per cent. of the voting shares.
(4) Where any action under sub-section (1) is taken by the resolution professional without seeking the approval of the committee of creditors in the manner as required in this section, such action shall be void.
(5) The committee of creditors may report the actions of the resolution professional under sub-section (4) to the Board for taking necessary actions against him under this code.”

19. In the present case, it has not been shown that CIRP cost, which has been determined by the Resolution Professional for running the business of the Corporate Debtor was required approval of CoC under Section 28 of the Code. The Adjudicating Authority by the impugned order in paragraph 6.2 has held that CoC shall be competent to determine the quantum of CIRP cost payable under the Plan. When the Plan has been approved by the CoC, which included payment of the CIRP cost and it is not shown that CIRP cost determined by the Resolution Professional required any approval under Section 28, we fail to see any reason for redetermination of the CIRP cost by the CoC. The direction to CoC to redetermine the CIRP cost after approval of the Resolution Plan by the CoC is unsustainable. We, thus, accept the submission of the Appellant that direction in paragraph 6.2 deserves to be set aside. We, however, notice the submission of the Resolution Professional that Resolution Professional has obtained Audit Report regarding the CIRP cost and CIRP cost of INR 92.41 crores is now approved. In paragraph 4.26 and 4.27 of the reply of the Resolution Professional, following has been stated:

June 2023 and the CoC on 16 June 2023.

4.27. Upon such audit being completed, pursuant to the directions of the Hon’ble Adjudicating Authority in the Plan Approval Order, the Answering Respondent duly convened a CoC meeting on 16 June 2023 and placed the audited CIRP costs before the CoC for its consideration. After detailed discussions, the CoC approved the audited CIRP cost to the extent of INR 92.41 Crores (including the amounts payable to the Appellants). Copy of the minutes of the 43rd CoC meeting is annexed as details of the outstanding dues of the Appellants during the CIRP period is annexed as Annexure – R1.”

20. The audited Report has also been approved by the CoC towards the CIRP cost to the extent of INR 92.41 crores, as submitted by learned Counsel for the Resolution Professional, we are of the view that no approval of the CoC was required for payment of the said CIRP cost. The audited Report was obtained by Resolution Professional to satisfy himself and to obtain a confirmation of his determination of the CIRP cost by an Auditor, which having been done, no further approval of the CoC was required for payment of CIRP Cost. We, thus, are of the view that directions issued by the Adjudicating Authority in paragraph 6.2, empowering the CoC to redetermine CIRP cost deserves to be set aside and is hereby set aside.

21. Now coming to Question No.(III), by which Adjudicating Authority directed the Resolution Professional not to release the payment of CIRP cost, till the disposal of the avoidance application, and the amount to be detained shall be subject to appropriation towards any amount found recoverable from such promoter/ KMP.

22. The determination of CIRP cost and payment of CIRP cost to those who found entitled to receive the payments is an independent process from any recovery from Promoters/ KMPs, consequent to avoidance application filed by Resolution Professional under the provisions of the Code, including Section 66 of the Code. The directions, which were issued by the Adjudicating Authority in paragraph 6.5 was to withhold the claim of Promoters/ KMPs, falling for adjudication and before releasing the amount payable to such Promoters/ KMPs amount was directed to be detained and was made subject to appropriation towards amount found recoverable from such Promoters/ KMPs towards CIRP cost. The above direction can be sustained subject to a modification, which according to us shall balance the interest of all. We are of the view that Resolution Professional shall determine the amount payable towards the CIRP cost to Promoters/ KMPs and as per his determination, the amount payable to Promoters/ KMPs shall be kept in Fixed Deposit Receipt (“FDR”), so as to earn interest, which FDR shall be released to those Promoters/ KMPs only after determination of their liability in the avoidance applications, which are pending adjudication before the Adjudicating Authority. The avoidance applications, which are pending before the Adjudicating Authority may also be expeditiously considered and decided, so as to not withhold the receipt of the payment by such Promoters/ KMPs for a long period. In result, we modify paragraph 6.5 of the Adjudicating Authority in following manner:

(i) The amount of CIRP cost payable to Promoters/ KMPs as determined by Resolution Professional, shall be kept in FDR in favour of such Promoters or KMPs in any of the nationalized bank by the Resolution Professional.

(ii) The FDR shall be released in favour of Promoters/ KMPs after adjusting any amount, which is found recoverable
from such Promoters/ KMPs, consequent to any order passed by the Adjudicating Authority in avoidance applications, which are pending before the Adjudicating Authority under the Code.

(iii) The Adjudicating Authority may expeditiously dispose of the avoidance applications, which are pending against the Promoters/ KMPs as early as possible after receipt of this order.

24. After approval of the Resolution Plan, the Adjudicating Authority is fully empowered to issue any direction, as to how the avoidance applications has to be pursued and direction to pursue the avoidance applications by the CoC as issued therein is fully justifiable and does not warrant any interference at the instance of the Appellant.

25. In view of the foregoing discussions, we partly allow the Appeal in following manner:

(a) Direction contained in paragraph 6.2 of the impugned order is set aside.

(b) Direction contained in paragraph 6.5 is modified in following manner:

(i) The amount of CIRP cost payable to Promoters/ KMPs as determined by Resolution Professional, shall be kept in a FDR in favour of such Promoters or KMPs in any of the nationalized bank by the Resolution Professional.

(ii) The FDR shall be released in favour of Promoters/ KMPs after adjusting any amount, which is found recoverable from such Promoters/ KMPs, consequent to any order passed by the Adjudicating Authority in avoidance applications, which are pending before the Adjudicating Authority under the Code.

(iii) The Adjudicating Authority may expeditiously dispose of the avoidance applications, which are pending against the Promoters/ KMPs as early as possible after receipt of this order.

Parties shall bear their own costs.